#Market Strategy — 04.12.2017

Tax Reform in the US: a milestone has been reached

Guy Ertz

Now that the Senate passed its tax reform bill, the final vote is likely to happen before Christmas.

The Senate vote and the next steps

The Senate passed its tax reform bill on Saturday. The Senate vote was probably the toughest challenge in the tax reform process. Now that the House and the Senate have passed their respective tax bills, they must reconcile their differences. After they have reached an agreement, each chamber will vote on a single bill. In the meantime, both the House and the Senate will choose representatives for a temporary body called the “conference committee” in order to smooth out discrepancies. The House and the Senate will vote on the motions during the conference committee by the middle of this week. This committee could come up with a final bill before Christmas.

A government shutdown?

The present resolution allowing for the US government to be funded expires on 8 December. There remains a degree of uncertainty regarding a second agreement supported by both the Democrats and the Republicans. Indeed, both votes are needed to pass a bill to prevent a government shutdown. Republicans will be keen to continue finalising the tax reform. This increases the likelihood that a compromise will be found for funding government operations and agencies. Note that the “mid-term elections” will be held in November 2018, so this is a key incentive for the Republicans to push through the tax reform vote as soon as possible.

Market reactions

The news was somewhat unexpected. The markets were probably assuming that some form of the bill would be passed, but the prospect of a final vote before Christmas came as a pleasant surprise. Consequently, the dollar is appreciating slightly against the euro. Asian equity markets were rather mixed on Monday morning while European markets were generally on the rise. US bond yields on short maturities rose slightly but changed very little on longer dated maturities. Yields in the eurozone barely moved.

The decision by the Senate and the expected vote are part of our existing global scenario. At this stage, there is no reason to change our investment strategy.